-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I3LidL15Z21Psj/fNqr4rNOnd+7KIrH3QhvRWrz5bLTGnhZu+N0Dydken9/wzslG 0dCChi/Q+WXhjhyOU288hg== 0000090045-00-000013.txt : 20000516 0000090045-00-000013.hdr.sgml : 20000516 ACCESSION NUMBER: 0000090045-00-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARAGON TECHNOLOGIES INC CENTRAL INDEX KEY: 0000090045 STANDARD INDUSTRIAL CLASSIFICATION: CONSTRUCTION, MINING & MATERIALS HANDLING MACHINERY & EQUIP [3530] IRS NUMBER: 221643428 STATE OF INCORPORATION: PA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-15729 FILM NUMBER: 635016 BUSINESS ADDRESS: STREET 1: 600 KUEBLER ROAD CITY: EASTON STATE: PA ZIP: 18040 BUSINESS PHONE: 6102527321 MAIL ADDRESS: STREET 1: P O BOX 70 CITY: EASTON STATE: PA ZIP: 18040 FORMER COMPANY: FORMER CONFORMED NAME: SI HANDLING SYSTEMS INC DATE OF NAME CHANGE: 19920703 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended March 31, 2000 Commission File No. 0-3362 PARAGON TECHNOLOGIES, INC. - -------------------------------------------------------------------------------- (Exact Name Of Registrant As Specified In Its Charter) Pennsylvania 22-1643428 ---------------------------------------- ------------------ (State Or Other Jurisdiction Of (I.R.S. Employer Incorporation Or Organization) Identification No.) 600 Kuebler Road, Easton, PA 18040 ------------------------------------------ --------- (Address Of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: 610-252-7321 ------------ SI HANDLING SYSTEMS, INC. - -------------------------------------------------------------------------------- (Former Name of Registrant) Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- Number of shares of common stock, par value $1.00 per share, outstanding as of March 31, 2000: 4,184,878. --------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements - ------ -------------------- Paragon Technologies, Inc. and Subsidiary Consolidated Balance Sheets (Unaudited) March 31, 2000 and December 31, 1999 (In Thousands, Except Share Data)
March December 31, 2000 31, 1999 ---------- ---------- Assets - ------ Current assets: Cash and cash equivalents, principally time deposits $ 777 6,242 ------ ------ Receivables: Trade (net of allowance for doubtful accounts of $55 as of March 31, 2000 and $54 as of December 31, 1999) 10,629 6,824 Notes and other receivables 804 952 ------ ------ Total receivables 11,433 7,776 ------ ------ Costs and estimated earnings in excess of billings 1,713 1,864 ------ ------ Inventories: Raw materials 2,779 1,819 Finished goods and work-in-process 1,171 1,586 ------ ------ Total inventories 3,950 3,405 ------ ------ Deferred income tax benefits 1,684 1,684 Prepaid expenses and other current assets 483 715 ------ ------ Total current assets 20,040 21,686 ------ ------ Property, plant and equipment, at cost: Land 327 327 Buildings and improvements 3,717 3,717 Machinery and equipment 6,193 6,078 ------ ------ 10,237 10,122 Less: accumulated depreciation 6,938 6,788 ------ ------ Net property, plant and equipment 3,299 3,334 ------ ------ Deferred income tax benefits 260 260 Investments in joint ventures 1,423 1,399 Excess of cost over fair value of net assets acquired, less amortization of $233 as of March 31, 2000 and $116 as of December 31, 1999 18,407 18,524 Other assets, at cost less accumulated amortization of $137 as of March 31, 2000 and $121 as of December 31, 1999 186 203 ------ ------ Total assets $ 43,615 45,406 ====== ======
See accompanying notes to consolidated financial statements. - 2 - Item 1. Financial Statements (Continued) - ------ -------------------- Paragon Technologies, Inc. and Subsidiary Consolidated Balance Sheets (Unaudited) March 31, 2000 and December 31, 1999 (In Thousands, Except Share Data)
March December 31, 2000 31, 1999 ---------- ---------- Liabilities and Stockholders' Equity Current liabilities: Current installments of long-term debt $ 1,261 1,578 Accounts payable 5,820 5,169 Customers' deposits and billings in excess of costs and estimated earnings 3,241 5,154 Accrued salaries, wages, and commissions 966 1,356 Income taxes payable 584 49 Accrued royalties payable 91 284 Accrued product warranties 953 903 Accrued pension and retirement savings plan liabilities 494 463 Accrued other liabilities 671 1,355 ------ ------ Total current liabilities 14,081 16,311 ------ ------ Long-term liabilities: Long-term debt, excluding current installments: Term loan 12,125 12,438 Subordinated notes payable 3,000 3,000 Other 13 13 ------ ------ Total long-term debt 15,138 15,451 Deferred compensation 199 219 ------ ------ Total long-term liabilities 15,337 15,670 ------ ------ Stockholders' equity: Common stock, $1 par value; authorized 20,000,000 shares; issued and outstanding 4,184,878 shares as of March 31, 2000 and 4,184,878 shares as of December 31, 1999 4,185 4,185 Additional paid-in capital 6,817 6,817 Retained earnings 3,195 2,423 ------ ------ Total stockholders' equity 14,197 13,425 ------ ------ Total liabilities and stockholders' equity $ 43,615 45,406 ====== ======
See accompanying notes to consolidated financial statements. - 3 - Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Consolidated Statements of Operations (Unaudited) For the Three Months Ended March 31, 2000 and March 31, 1999 (In Thousands, Except Share And Per Share Data)
Three Months Ended --------------------------- March March 31, 2000 31, 1999 ---------- ---------- Net sales $ 18,344 9,738 Cost of sales 13,912 7,541 --------- --------- Gross profit on sales 4,432 2,197 --------- --------- Selling, general and administrative expenses 2,390 1,498 Product development costs 49 69 Amortization of goodwill 117 - Employee severance and termination benefits 337 - Interest expense 421 11 Interest income (61) (42) Equity in income of joint ventures (24) (7) Other income, net (86) (54) --------- --------- 3,143 1,475 --------- --------- Earnings before income taxes 1,289 722 Income tax expense 517 281 --------- --------- Net earnings $ 772 441 ========= ========= Basic earnings per share $ .18 .12 ========= ========= Diluted earnings per share $ .17 .12 ========= ========= Weighted average shares outstanding 4,184,878 3,705,048 Dilutive effect of stock options 2,246 17,819 Dilutive effect of phantom stock units 18,120 13,525 --------- --------- Weighted average shares outstanding assuming dilution 4,205,244 3,736,392 ========= =========
See accompanying notes to consolidated financial statements. - 4 - Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Consolidated Statements of Cash Flows (Unaudited) For the Three Months Ended March 31, 2000 and March 31, 1999 (In Thousands, Except Share Data)
Three Months Ended --------------------------- March March 31, 2000 31, 1999 ---------- ---------- Cash flows from operating activities: Net earnings $ 772 441 Adjustments to reconcile net earnings to net cash used by operating activities: Depreciation of plant and equipment 150 58 Amortization of intangibles 133 7 Gain on disposition of equipment (2) - Equity in income of joint ventures (24) (7) Change in operating assets and liabilities, net of effects of the acquisition of Ermanco Incorporated: Receivables (3,657) (2,433) Costs and estimated earnings in excess of billings 151 904 Inventories (545) 239 Deferred income tax benefits - (165) Prepaid expenses and other current assets 232 138 Other noncurrent assets 1 (88) Accounts payable 651 (943) Customers' deposits and billings in excess of costs and estimated earnings (1,913) (1,472) Accrued salaries, wages, and commissions (390) 31 Income taxes payable 535 315 Accrued royalties payable (193) 27 Accrued pension and retirement savings plan liabilities 31 (3) Accrued product warranties 50 124 Accrued other liabilities (453) 22 Deferred compensation (20) (3) ------ ------ Net cash used by operating activities (4,491) (2,808) ------ ------ Cash flows from investing activities: Proceeds from the disposition of equipment 2 - Additional consideration paid in connection with Ermanco acquisition (231) - Additions to property, plant and equipment (115) (202) ------ ------ Net cash used by investing activities (344) (202) ------ ------
See accompanying notes to consolidated financial statements. - 5 - Item 1. Financial Statements (Continued) Paragon Technologies, Inc. and Subsidiary Consolidated Statements of Cash Flows (Unaudited) (Continued) For the Three Months Ended March 31, 2000 and March 31, 1999 (In Thousands, Except Share Data)
Three Months Ended --------------------------- March March 31, 2000 31, 1999 ---------- ---------- Cash flows from financing activities: Sale of common shares in connection with employee incentive stock option plan - 14 Repayment of long-term debt (630) (2) Repurchase and retirement of common stock - (242) ------ ------ Net cash used by financing activities (630) (230) ------ ------ Decrease in cash and cash equivalents (5,465) (3,240) Cash and cash equivalents, beginning of period 6,242 4,785 ------ ------ Cash and cash equivalents, end of period $ 777 1,545 ====== ====== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 780 1 ====== ====== Income taxes $ 36 12 ====== ====== Supplemental disclosures of noncash investing and financing activities: Issuance of 6,011 common shares in exchange for 2,250 common shares delivered to the Company by an officer in connection with the employee incentive stock option. $ - 28 ====== ======
See accompanying notes to consolidated financial statements. - 6 - Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Notes To Consolidated Financial Statements Three Months Ended March 31, 2000 and March 31, 1999 (1) The information contained in this Form 10-Q report is unaudited and is subject to year-end adjustments and audit. However, in the opinion of management, the interim financial statements furnished reflect all adjustments and accruals, which are necessary to a fair statement of results for the interim periods presented. The financial statements include the accounts of the Company and Ermanco Incorporated ("Ermanco"), a wholly-owned subsidiary company, after elimination of inter-company balances and transactions. Results for interim periods are not necessarily indicative of results expected for the fiscal year. Refer to the Company's Form 10-K for the ten months ended December 31, 1999 for more complete financial information. On September 30, 1999, the Board of Directors of the Company approved an amendment to Article I, Section 1.03 of the Company's Bylaws to change the fiscal year end of the Company from the Sunday nearest to the last day of February to December 31. The Company filed a Form 10-K for the 10-month period ending December 31, 1999 to cover the transition period. The prior year comparative financial information in this Form 10-Q report reflects the months of January, February, and March 1999. On February 9, 2000, the Board of Directors of the Company approved an amendment to Article 1 of the Company's Articles of Incorporation to change the name of the Company from SI Handling Systems, Inc. to Paragon Technologies, Inc. ("Paragon" or the "Company"). Paragon will be the corporate entity currently consisting of two separate brands: SI Systems (formerly referred to as "SI Easton") and Ermanco Incorporated ("Ermanco"). This amendment became effective on April 5, 2000. On March 9, 2000, the Company's common stock began trading on the American Stock Exchange (Amex) under the symbol "PTG." Prior to this date, the Company's common stock was traded on The Nasdaq Stock Market under the symbol "SIHS." (2) SI/BAKER, INC. -------------- Paragon Technologies, Inc., (formerly,"SI Handling Systems, Inc.") and McKesson Automated Prescription Systems, Inc. ("McKesson APS"), formerly known as Automated Prescription Systems, Inc., are co-venturers in a joint venture named SI/BAKER, INC.("SI/BAKER" or the "joint venture"). On September 29, 1998, McKesson Corporation [NYSE: MCK], a healthcare supply management company, announced the completion of its acquisition of Automated Prescriptions Systems, Inc. Automated Prescription Systems, Inc. was renamed McKesson Automated Prescription Systems, Inc. The SI/BAKER joint venture draws upon the automated materials handling systems experience of SI Systems and the automated pill counting and dispensing products of McKesson APS to provide automated pharmacy systems. Each member company contributed $100,000 in capital to fund the joint venture. The joint venture designs and installs computer controlled, fully automated, integrated systems for managed care pharmacy operations. The joint venture's systems are viewed as labor saving devices, which address the issues of improved productivity and cost reduction. Systems can be expanded as customers' operations grow and they may be integrated with a wide variety of components to meet specific customer needs. Schedule A contains the SI/BAKER, INC. financial statements. The information contained in the SI/BAKER, INC. financial statements is unaudited and is subject to year-end adjustments and audit. However, in the opinion of management, the interim financial - 7 - Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Notes To Consolidated Financial Statements Three Months Ended March 31, 2000 and March 31, 1999 statements furnished reflect all adjustments and accruals, which are necessary to a fair statement of results for the interim periods presented. On November 4, 1999, the Board of Directors of SI/BAKER approved an amendment to Article VII, Section 5 of the Bylaws to change the fiscal year end of the Company from the last day of February to December 31. SI/BAKER's financial statements for the 10-month period ending December 31, 1999 was included in the Company's report on Form 10-K for the 10-month period ending December 31, 1999. The prior year comparative financial information in this Form 10-Q report reflects the months of January, February, and March 1999. (3) Modular Automation Corp. ----------------------- On April 13, 1999, the Company acquired all of the outstanding common stock of Modular Automation Corp. ("MAC") of Greene, New York for $1,957,000. The acquisition required a net cash outlay of $928,000. The purchase price of the acquisition was allocated to the assets acquired based on fair value with the remainder representing goodwill. The acquired Automated Guided Vehicle ("AGV") products and personnel were integrated into the SI Systems operation. As of December 31, 1999, the AGV product line associated with the MAC acquisition was abandoned. The write-off of certain long-lived assets, including goodwill, totaling $561,000 was recognized in the Consolidated Statement of Operations for the ten months ended December 31, 1999 in accordance with the criteria set forth by SFAS No. 121. On the basis of a pro forma consolidation of the result of operations as if the acquisition of MAC had taken place on January 1, 1999, management believes that the acquisition would not have had a material effect on the reported amounts. (4) Ermanco Incorporated -------------------- On September 30, 1999, the Company acquired all of the outstanding common stock of Ermanco Incorporated. Ermanco, headquartered in Spring Lake, Michigan, designs and installs complete conveyor systems for a variety of manufacturing and warehousing applications. Under terms of the Stock Purchase Agreement and based on the definitive closing balance sheet, the Company acquired all of the outstanding common stock of Ermanco for a purchase price of $22,801,000 consisting of $15,301,000 in cash, of which $1,551,000 is held in escrow ($801,000 was released in January 2000), $3,000,000 in promissory notes payable to fourteen stockholders of Ermanco, and 481,284 shares of the Company's common stock with a value of $4,500,000 based on the average closing price of $9.35 of the Company's common stock for the five trading days immediately preceding the date of the Stock Purchase Agreement, August 6, 1999. The Company financed $14,000,000 of the acquisition through term debt. The acquisition required a net cash outlay of $2,264,000. The acquisition was accounted for as purchase in accordance with APB No. 16 and, accordingly, the acquired assets and assumed liabilities have been recorded at their estimated fair value at the date of acquisition. The amount of goodwill recorded at the time of acquisition was $18,640,000 and is being amortized over a period of 40 years. - 8 - Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Notes To Consolidated Financial Statements Three Months Ended March 31, 2000 and March 31, 1999 On the basis of a pro forma consolidation of the results of operations of Ermanco, as if the acquisition had taken place on January 1, 1999, the following pro forma financial results for the three months ended March 31, 1999 are as follows (in thousands, except per share amounts):
For the Three Months Ended March 31, 1999 -------------------------- Net sales $ 16,638 ====== Net earnings $ 535 ====== Basic earnings per share $ .13 ====== Diluted earnings per share $ .13 ======
(5) Major Segments of Business -------------------------- Operating segments are defined as components of an enterprise in which separate financial information is available and evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company identified such segments based on both management responsibility and types of products offered for sale. On September 30, 1999, Paragon Technologies, Inc. (formerly, "SI Handling Systems, Inc.") ("the Company") concluded the acquisition of all of the outstanding common stock of Ermanco Incorporated ("Ermanco"). Ermanco operates as a wholly-owned subsidiary of the Company. The Company's Easton, Pennsylvania operations (hereafter referred to as "SI Systems") is a systems integrator supplying automated materials handling systems to manufacturing, order selection, and distribution operations. The systems are designed, sold, manufactured, installed, and serviced by its own staff, or by others, for SI Systems, at its direction, generally as labor-saving devices to improve productivity and reduce costs. SI Systems' products are utilized to automate the movement or selection of products and are often integrated with other automated equipment, such as conveyors and robots. SI Systems' products involve both standard and specially designed components and include integration of non-proprietary automated handling technologies so as to provide solutions for its customers' unique materials handling needs. SI Systems' staff develops and designs computer control programs required for the efficient operation of the systems. Although SI Systems is not dependent on any single customer, much of its revenue is derived from contracts to design, manufacture, and install large-scale materials handling systems for major North American corporations and the federal government. Ermanco is a manufacturer of light to medium duty unit handling conveyor products, serving the material handling industry through local independent distributors in North America. Ermanco also provides complete conveyor systems for a variety of applications, including distribution, and manufacture of computers and electronic products, utilizing primarily its own manufactured conveyor products, engineering services by its own staff or subcontracted, and subcontracted installation services. The systems product line of Ermanco accounts for approximately 40% of Ermanco's total revenues, and the balance is from distribution (resale). SI Systems' products are sold on a fixed price basis. Generally, contract terms provide for progress payments and a portion of the purchase price is withheld by the buyer until - 9 - Item 1. Financial Statements (Continued) - ------- -------------------- Paragon Technologies, Inc. and Subsidiary Notes To Consolidated Financial Statements Three Months Ended March 31, 2000 and March 31, 1999 the system has been accepted. Ermanco's products and services are also sold on a fixed price basis. Generally, contract terms are net 30 days for product sales, with progressive payments for system-type projects. Prior to the acquisition, the Company operated in one major market segment. With the addition of the Ermanco operations, the Company now operates in two major market segments, and products are sold worldwide as follows (in thousands):
For the three months ended Automated Material Conveyor March 31, 2000: Handling Systems Systems Total --------------------------------- ------------------ --------- ------ Sales $ 7,740 10,604 18,344 Earnings before interest expense, interest income, equity in income of joint ventures, and income taxes 301 1,324 1,625 Total assets 13,354 30,261 43,615 Capital expenditures 25 90 115 Depreciation and amortization expense 101 182 283
Geographic segment information was as follows (in thousands):
For the three months ended March 31, 2000: Domestic Europe and Asia Canada Total ---------------------------- -------- --------------- ------ ------ Sales $ 16,828 1,243 273 18,344 Earnings (loss) before interest expense, interest income, equity in income of joint ventures, and income taxes 1,625 - - 1,625 Total assets 43,615 - - 43,615 Capital expenditures 115 - - 115 Depreciation and amortization expense 283 - - 283
Intersegment sales for the three months ended March 31, 2000 totaled $3,000. (6) Long-Term Debt -------------- On March 30, 2000, the Company received a waiver of certain loan covenants as well as an amendment to the term loan and line of credit agreements relative to future covenant requirements, a variable term loan interest rate increase to LIBOR plus 3%, and limitations on the payment of interest on subordinated debt. - 10 - Item 2. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations ------------- Liquidity And Capital Resources - ------------------------------- The Company's cash and cash equivalents decreased to $777,000 at March 31, 2000 from $6,242,000 at December 31, 1999. The decrease resulted from cash used by operating activities totaling $4,491,000, repayment of long-term debt of $630,000, purchases of capital equipment of $115,000, and additional consideration and costs of $231,000 paid in connection with the Ermanco acquisition. Funds used by operating activities during the three months ended March 31, 1999 were $2,808,000. On April 13, 1999, the Company acquired all of the outstanding common stock of Modular Automation Corp. ("MAC") of Greene, New York for $1,957,000. The acquisition required a net cash outlay of $928,000. The purchase price of the acquisition was allocated to the assets acquired based on fair value with the remainder representing goodwill. The acquired Automated Guided Vehicle ("AGV") products and personnel were integrated into the SI Systems operation. However, as of December 31, 1999, the AGV product line associated with the MAC acquisition was abandoned. The write-off of certain long-lived assets, including goodwill, totaling $561,000 was recognized in the Consolidated Statement of Operations for the ten months ended December 31, 1999 in accordance with the criteria set forth by SFAS No. 121. On September 30, 1999, the Company completed the acquisition of all the outstanding common stock of Ermanco Incorporated ("Ermanco"). Ermanco, headquartered in Spring Lake, Michigan, designs and installs complete conveying systems for a variety of manufacturing and warehousing applications. Under the terms of the Stock Purchase Agreement, the Company acquired all of the outstanding common stock of Ermanco for a purchase price of $22,801,000 consisting of $15,301,000 in cash, of which $1,551,000 is held in escrow ($801,000 was released in January 2000), $3,000,000 in promissory notes payable to the fourteen stockholders of Ermanco, and 481,284 shares of the Company's common stock with a value of $4,500,000 based on the average closing price of $9.35 of the Company's common stock for the five trading days immediately preceding the date of the Stock Purchase Agreement, August 6, 1999. The Company financed $14,000,000 of the acquisition through term debt. The acquisition required a net cash outlay of $2,264,000. The acquisition was accounted for as a purchase in accordance with APB No. 16 and, accordingly, the acquired assets and assumed liabilities have been recorded at their estimated fair value at the date of acquisition. The amount of goodwill recorded at the time of acquisition was $18,640,000 and is being amortized over a period of 40 years. On the closing date of the acquisition, the Company entered into employment agreements with four employees. Leon C. Kirschner and Steven Shulman, both principal stockholders of Ermanco, joined the Board of Directors of the Company. In order to complete the Ermanco acquisition, the Company obtained financing from its principal bank. The Company entered into a new three-year line of credit facility which may not exceed the lesser of $6,000,000 or an amount based on a borrowing base formula tied principally to accounts receivable, inventory, and fair market value of the Company's property and plant, and liquidation value of equipment, plus an amount equal to $2,500,000. This amount will be reduced by $625,000 every six months during the first two years of the line of credit facility until such amount reaches zero, minus the unpaid principal balance of the term loan described below. The line of credit facility is to be used primarily for working capital purposes. As of March 31, 2000, the Company did not have any borrowings under the line of credit facility. The Company financed $14,000,000 of the acquisition through a seven-year term loan from its bank. During the first two years of the term loan, the Company will repay equal quarterly payments of $312,500 plus accrued interest. After the second anniversary of the September 30, 1999 closing date, the Company will make equal quarterly payments of $575,000, plus interest. The interest rate on $7,000,000 of the term loan is variable at a rate - 11 - Item 2. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations ------------- Liquidity And Capital Resources (Continued) - ------------------------------- equal to the three-month LIBOR Market Index Rate plus three percent. The Company also entered into an interest rate swap agreement for fifty percent of the term loan to hedge the floating interest rate. The seven-year interest rate swap for $7,000,000 was at a fixed rate of 9.38%. To obtain the line of credit and term loan, the Company granted the bank a security interest in all personal property, including, without limitation, all accounts, deposits, documents, equipment, fixtures, general intangibles, goods, instruments, inventory, letters of credit, money, securities, and a first mortgage on all real estate. The line of credit facility and term loan contain various restrictive covenants relating to additional indebtedness, asset acquisitions or dispositions, investments, guarantees, payment of dividends, and maintenance of certain financial ratios. The Company was in compliance with all covenants, as amended, as of March 31, 2000. The promissory notes issued to the fourteen stockholders of Ermanco totaled $3,000,000, have a term of seven years, and bear interest at an annual rate of ten percent in years one through three, twelve percent in years four and five, and fourteen percent in years six and seven. The weighted average interest rates on the promissory notes is 11.714% over the term of the notes. Interest shall be payable quarterly, in cash or under certain conditions, in the Company's common stock upon approval of the Company's Board of Directors. The promissory notes may be prepaid prior to the end of the seven-year term provided that there is no debt outstanding under its line of credit facility and term loan. Effective April 1, 2000, the Company is prohibited from making any cash payments of subordinated debt and interest until the Company is in full compliance with all the financial covenants as originally set forth in the Loan Agreement with the Company's principal bank. On March 4, 1996, SI/BAKER established a $2,500,000 line of credit facility (the "facility") with its principal bank (the "bank"). Under the terms of the facility, SI/BAKER's parent companies, Paragon Technologies, Inc. (formerly, "SI Handling Systems, Inc.") and McKesson Automated Prescription Systems, Inc., have each provided a limited guarantee and surety in an amount not to exceed $1,000,000 for a combined guarantee of $2,000,000 to the bank for the payment and performance of the related note, including any further renewals or modifications of the facility. During the fiscal year ended March 1, 1998, the bank increased the borrowing availability to $3,000,000 and extended the expiration date of the facility. On March 31, 2000, SI/BAKER did not have any borrowings under the facility, the facility expires effective August 31, 2000. The Company believes that its financial resources consisting of its current assets, anticipated cash flow, and the available line of credit facility will adequately finance its operating requirements for the foreseeable future. The Company plans to consider expansion opportunities as they arise, although ongoing operating results of the Company, the restrictive covenants associated with the recent financing obtained from the Company's principal bank, the economics of the expansion, and the circumstances justifying the expansion will be key factors in determining the amount of resources the Company will devote to further expansion. The Company did not have any material capital commitments as of March 31, 2000. - 12 - Item 2. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations ------------- Results Of Operations - --------------------- Three Months Ended March 31, 2000 Versus Three Months Ended March 31, 1999 - -------------------------------------------------------------------------- On September 30, 1999, the Board of Directors of the Company approved an amendment to Article I, Section 1.03 of the Bylaws to change the fiscal year end of the Company from the Sunday nearest to the last day of February to December 31. For the year ended December 31, 1999, the fiscal year consisted of ten months. The prior year comparative financial information in this Form 10-Q report reflects the months of January, February, and March 1999. On September 30, 1999, the Company concluded the acquisition of all of the outstanding common stock of Ermanco Incorporated. Ermanco operates as a wholly owned subsidiary of Paragon Technologies, Inc. and the results for the three months ended March 31, 2000 include the operations of Ermanco. However, the prior year comparative information in the Form 10-Q does not reflect the operations of Ermanco. The Company's net earnings for the three months ended March 31, 2000 were $772,000 compared to net earnings of $441,000 for the three months ended March 31, 1999. Unfavorably impacting the net earnings of $772,000 for the three months ended March 31, 2000 were employee severance and termination benefits of $337,000. The total backlog at March 31, 2000 was approximately $24,290,000. During the first three months of 2000, the Company received orders totaling approximately $18,950,000. Net sales of $18,344,000 for the three months ended March 31, 2000 increased 88.4% compared to net sales of $9,738,000 for the three months ended March 31, 1999. The sales increase of $8,606,000 is comprised of Ermanco's contribution to product sales approximating $10,604,000, offset by a decrease in SI Systems' sales of approximately $1,998,000 for the three months ended March 31, 2000, when compared to the three months ended March 31, 1999. The SI Systems' sales decrease in the three months ended March 31, 2000 was primarily attributable to a smaller backlog of orders at December 31, 1999, versus a larger backlog of orders at December 31, 1998. SI Systems experienced a decline in sales across all product lines, with the majority of the decrease relating to sales of the Cartrac, Lo-Tow, and Order Selection product lines. The Company's business is dependent upon a limited number of large contracts with certain customers. This dependence can cause unexpected fluctuations in sales volume. Gross profit as a percentage of sales was 24.2% for the three months ended March 31, 2000 compared to 22.6% for the three months ended March 31, 1999. Ermanco's gross profit as a percentage of sales was 23.8% for the three months ended March 31, 2000. The increase in the gross profit percentage for the three months ended March 31, 2000 was attributable to enhanced internal controls relative to pricing practices and favorable performances on several contracts, principally for SI Systems' higher margin proprietary products lines, initiated in the prior fiscal year that were completed or nearing completion during the first three months ended March 31, 2000. Partially offsetting the impact of the favorable performances on several contracts was the recognition of approximately $1,125,000 in sales at no gross profit margin on three major contracts where significant cost overruns, resulting in losses, were experienced during the ten months ended December 31, 1999. Estimates relative to loss contracts, which the Company experienced to an unusual extent in the period ended December 31, 1999, are inherently more difficult to make than those in which the contract has proceeded according to original expectations. Uncertainty exists with - 13 - Item 2. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations ------------- Results Of Operations (Continued) - --------------------- Three Months Ended March 31, 2000 Versus Three Months Ended March 31, 1999 - -------------------------------------------------------------------------- (Continued) respect to the resources required to accomplish the contractual scope or work dealing with the final integration of state-of-the-art automated materials handling systems. Consequently, while the Company believes the full effect of both projected and presently incurred cost overruns has been accrued, current estimates may need to be revised as additional information becomes available. Also the backlog of orders of approximately $2,800,000 attributable to these contracts will be recognized at no gross profit throughout the remainder of this calendar year. Selling, general and administrative expenses of $2,390,000 were higher by $892,000 in the three months ended March 31, 2000 than in the three months ended March 31, 1999. The increase of $892,000 is comprised of additional costs of operations totaling approximately $1,050,000 related to Ermanco, offset by a decrease in SI Systems' selling, general and administrative expenses of approximately $160,000 for the three months ended March 31, 2000, when compared to the three months ended March 31, 1999. The decrease in SI Systems' selling, general and administrative expenses was primarily attributable to the prior year comparable period containing larger amount of costs associated with product promotion and sales efforts aimed at expanding the customer base of the business. Product development costs of $49,000 were lower by $20,000 in the three months ended March 31, 2000, than in the three months ended March 31, 1999. Development progress in the three months ended March 31, 2000 and March 31, 1999 included enhancements to the Company's horizontal transportation and order selection product lines. Amortization of goodwill represented costs associated with the acquisition of Ermanco Incorporated on September 30, 1999. Goodwill amortization expense for the three months ended March 31, 2000 totaled approximately $117,000. There was no goodwill amortization expense associated with the Ermanco acquisition in the comparable prior year period. Employee severance and termination benefits of $337,000 for the three months ended March 31, 2000 was associated with a restructuring initiative, whereby the Company separated approximately sixteen employees. Interest income of $61,000 for the three months ended March 31, 2000, increased by $19,000, when compared to the three months ended March 31, 1999. The increase in interest income was primarily attributable to higher level of funds available for short-term investments during the three months ended March 31, 2000. Equity in income of joint ventures represents the Company's proportionate share of its investment in the SI-Egemin and SI/BAKER joint ventures, which are being accounted for under the equity method. The net favorable variance of approximately $17,000 in the equity in income of joint ventures for the three months ended March 31, 2000, was comprised of a favorable variance of approximately $59,000 attributable to the SI/BAKER joint venture, as compared to the three months ended March 31, 1999. Offsetting the increase of SI/BAKER's favorable variance was an unfavorable variance of approximately $42,000 attributable to the SI-Egemin joint venture. The favorable variance of $59,000 for the three months ended March 31, 2000 in the equity in income of SI/BAKER joint venture was primarily due to its increased sales of approximately $1,067,000 as compared to the three months ended March 31, 1999. SI/BAKER also experienced a reduction in product development expenses in the amount of approximately $59,000, and an increase in interest income, net of approximately $43,000 for the three months ended March 31, 2000, as compared to the three months ended March 31, 1999. Partially offsetting these favorable variances was SI/BAKER's increase of $43,000 in revenue-based royalty costs due to the parent companies. - 14 - Item 2. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations ------------- Results Of Operations (Continued) - --------------------- Three Months Ended March 31, 2000 Versus Three Months Ended March 31, 1999 - -------------------------------------------------------------------------- (Continued) The unfavorable variance of $42,000 for the three months ended March 31, 2000 in the equity in income of the SI-Egemin joint venture was attributable to start-up costs. The SI-Egemin joint venture was initiated in July 1999. The favorable variance in other income, net was primarily attributable to an increase in the revenue-based royalty income related to the SI/BAKER joint venture. The Company incurred income tax expense of $517,000 during the three months ended March 31, 2000, compared to income tax expense of $281,000 in the comparable prior year period. Income tax expense was generally recorded at statutory federal and state tax rates expected to apply for each fiscal year. Cautionary Statement - -------------------- Certain statements contained herein are not based on historical fact and are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission rules, regulations, and releases. The Company intends that such forward-looking statements be subject to the safe harbors created thereby. Among other things, they regard the Company's acquisition activities, earnings, liquidity, financial condition, and certain operational matters. Words or phrases denoting the anticipated results of future events, such as "anticipate," "believe," "estimate," "expect," "may," "will," "will likely," "are expected to," "will continue," "should," "project," and similar expressions that denote uncertainty, are intended to identify such forward-looking statements. The Company's actual results, performance, or achievements could differ materially from the results expressed in, or implied by, such "forward-looking statements": (1) as a result of risks and uncertainties identified in connection with those forward-looking statements, including those factors identified herein, and in the Company's other publicly filed reports; (2) as a result of risks and uncertainties associated with the Ermanco acquisition, including the failure to realize anticipated benefits of such acquisition, the failure to integrate Ermanco successfully with the Company, and any unforeseen complications related to the Ermanco acquisition; (3) as a result of risks associated with the Company's restructuring, including the failure to achieve anticipated operating savings, and the possibility that the restructuring charges will be greater than anticipated; (4) as a result of factors over which the Company has no control, including the strength of domestic and foreign economies, sales growth, competition, certain costs increases, and any potential exposures relating to Year 2000 matters; or (5) if the factors on which the Company's conclusions are based do not conform to the Company's expectations. Quantitative and Qualitative Disclosures - ---------------------------------------- The Company's primary market risk exposure is from changes in interest rates. The Company's policy is to manage interest rate exposure through the use of a combination of fixed and floating rate debt instruments, and in the three months ended March 31, 2000, an interest rate swap agreement. Generally, the Company seeks to match the terms of its debt with its purpose. The Company uses a variable rate line of credit facility to provide working capital for operations. On September 30, 1999, the Company entered into an interest rate swap agreement for 50% of its new term loan from its principal bank to effectively convert half of the term loan from a variable rate note to a fixed rate note. A standard interest rate swap agreement involves the payment of a fixed rate times a notional amount by one party in exchange for a floating rate times the same notional amount from another party. The counterpart to the swap agreement is the Company's principal bank. The Company does not believe that its exposures to interest rate risk or foreign currency exchange risk, risks from commodity prices, equity prices and other market changes that affect market risk sensitive instruments, including the interest rate swap agreement, are material to its results of operations. - 15 - PART II - OTHER INFORMATION --------------------------- Item 5. Other Information - ------- ----------------- On March 9, 2000, the Company's common stock began trading on the American Stock Exchange (Amex) under the symbol "PTG." Prior to this date, the Company's common stock was traded on The Nasdaq Stock Market(sm) under the symbol "SIHS." Effective April 5, 2000, SI Handling Systems, Inc. amended its Articles of Incorporation in order to change its name to Paragon Technologies, Inc. A Form 8-K was filed on April 7, 2000 regarding this change to the name of the Corporation. Effective May 10, 2000, Ronald J. Semanick became Vice President - Finance, Chief Financial Officer, and Treasurer of the Company. Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- (a) Exhibit 27 - Financial Data Schedule. (b) No reports on Form 8-K were filed during the quarter ended March 31, 2000. - 16 - Paragon Technologies, Inc. and Subsidiary SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PARAGON TECHNOLOGIES, INC. (formerly, "SI Handling, Systems, Inc.") /S/ William R. Johnson ---------------------------------------- William R. Johnson President & CEO Dated: May 15, 2000 ------------ - 17 - Schedule A ---------- SI/BAKER, INC. Financial Statements March 31, 2000 - 18 - SI/BAKER, INC. Balance Sheets (Unaudited) March 31, 2000 and December 31, 1999 (In Thousands, Except Share Data)
March December 31, 2000 31, 1999 ---------- --------- Assets Current assets: Cash and cash equivalents, principally time deposits $ 2,626 2,895 ----- ----- Receivables: Trade 1,438 1,358 Other receivables 127 129 ----- ----- Total receivables 1,565 1,487 ----- ----- Costs and estimated earnings in excess of billings 3,426 2,159 Deferred income tax benefits 391 391 Prepaid expenses and other current assets 128 53 ----- ----- Total current assets 8,136 6,985 ----- ----- Machinery and equipment, at cost 201 194 Less: accumulated depreciation 126 121 ----- ----- Net machinery and equipment 75 73 ----- ----- Equipment leased to customer 487 487 Less: accumulated depreciation 487 467 ----- ----- Net equipment leased to customer - 20 ----- ----- Deferred income tax benefits 22 22 ----- ----- Total assets $ 8,233 7,100 ===== =====
- 19 - SI/BAKER, INC. Balance Sheets (Unaudited) March 31, 2000 and December 31, 1999 (In Thousands, Except Share Data)
March December 31, 2000 31, 1999 ---------- --------- Liabilities and Stockholders' Equity Current liabilities: Accounts payable: Trade $ 674 739 Affiliated companies 137 64 ----- ----- Total accounts payable 811 803 ----- ----- Customers' deposits and billings in excess of costs and estimated earnings 2,985 2,114 Accrued salaries, wages, and commissions 238 247 Income taxes payable 40 143 Accrued royalties payable 475 361 Accrued product warranties 958 842 Accrued other liabilities 80 77 ----- ----- Total current liabilities 5,587 4,587 ----- ----- Stockholders' equity: Common stock, $1 par value; authorized 1,000 shares; issued 200 shares - - Additional paid-in capital 200 200 Retained earnings 2,446 2,313 ----- ----- Total stockholders' equity 2,646 2,513 ----- ----- Total liabilities and stockholders' equity $ 8,233 7,100 ===== =====
- 20 - SI/BAKER, INC. Statements of Operations (Unaudited) Three Months Ended March 31, 2000 and and March 31, 1999 (In Thousands)
Three Months Ended -------------------------- March March 31, 2000 31, 1999 ------------ ---------- Net sales $ 3,433 2,366 Cost of sales 2,875 1,929 ----- ----- Gross profit on sales 558 437 ----- ----- Selling, general and administrative expenses 269 267 Product development costs 16 75 Royalty expense to parent companies 137 94 Interest income (43) (9) Interest expense - 9 Other income, net (45) (41) ----- ----- 334 395 ----- ----- Earnings before income taxes 224 42 Income tax expense 91 28 ----- ----- Net earnings $ 133 14 ===== =====
- 21 - SI/BAKER, INC. Statements of Cash Flows (Unaudited) Three Months Ended March 31, 2000 and March 31, 1999 (In Thousands)
Three Months Ended ----------------------- March March 31, 2000 31, 1999 -------- -------- Cash flows from operating activities: Net earnings $ 133 14 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Depreciation of machinery and equipment and leased equipment 25 39 Changes in operating assets and liabilities: Receivables (78) 76 Costs and estimated earnings in excess of billings (1,267) 168 Deferred tax benefit - 35 Prepaid expenses and other current assets (75) 142 Other assets - - Accounts payable 8 (68) Customers' deposits and billings in excess of costs and estimated earnings 871 (89) Accrued salaries, wages, and commissions (9) (30) Income taxes payable (103) 18 Accrued royalties payable 114 57 Accrued product warranties 116 45 Accrued other liabilities 3 4 Deferred compensation - 12 ----- ----- Net cash provided (used) by operating activities (262) 423 ----- ----- Cash flows from investing activities: Additions to machinery and equipment (7) (7) ----- ----- Net cash used by investing activities (7) (7) ----- ----- Increase (decrease) in cash and cash equivalents (269) 416 Cash and cash equivalents, beginning of period 2,895 250 ----- ----- Cash and cash equivalents, end of period $ 2,626 666 ===== ===== Supplemental disclosure of cash flow information: Cash paid (received) during the period for: Income taxes $ 254 (175) ===== ===== Interest $ - - ===== =====
- 22 - PARAGON TECHNOLOGIES, INC. FORM 10-Q EXHIBIT INDEX Exhibit No. - ---------- 10.17 First Amendment to Term Note and Loan Agreement. 10.18 Modification Number One to Loan Agreement. 10.19 Second Amendment to Line of Credit. 27 Financial Data Schedule. - 23 - EX-10.17 2 EXHIBIT 10.17 Exhibit 10.17 ------------- FIRST AMENDMENT TO TERM NOTE AND LOAN AGREEMENT ----------------------------------------------- (TERM LOAN) Paragon Technologies, Inc. (formerly, "SI Handling Systems, Inc.") 600 Kuebler Road Easton, Pennsylvania 18040 Ermanco Incorporated 6870 Grand Haven Road Spring Lake, Michigan 49456 (Individually and collectively, "Borrower") First Union National Bank 702 Hamilton Street Allentown, Pennsylvania 18101 (Hereinafter referred to as "Bank") THIS FIRST AMENDMENT TO TERM NOTE AND LOAN AGREEMENT ("First Amendment") is entered into as of March 30, 2000, by and between the Bank and Borrower. BACKGROUND A. Bank is the holder of a Promissory Note executed and delivered by Borrower, dated September 30, 1999, in the original principal amount of $14,000,000.00 (the "Note"); and certain other loan documents, including, without limitation, a Loan Agreement dated September 30, 1999 (the "Loan Agreement"). B. The term "Loan Documents", as used in this Agreement, is defined in the Note. All capitalized terms used but not defined herein shall have the meanings assigned in the Loan Documents. C. Borrower has requested Bank to waive the following Defaults (collectively, the "Existing Defaults") under the Loan Documents: (i) Borrower failed to maintain the requisite Funds Flow Coverage Ratio for the period ending December 31, 1999; (ii) Borrower's aggregate outstanding Obligations exceeded the amount permitted under the Borrowing Base determined pursuant to the terms of the Loan Agreement for the $6,000,000.00 Line of Credit with the Bank for the period ending December 31, 1999; and (iii) Borrower defaulted under the terms of that certain Subordination Agreement dated September 30, 1999 (the "Subordination Agreement"), executed by Borrower, Bank and the Creditors identified therein, in that Borrower made payments of interest on the Subordinated Debt for the quarterly periods ending December 31, 1999 and March 31, 2000, at a time when Borrower was in default under the Loan Documents. D. Bank is willing to waive the Existing Defaults in consideration of Borrower's execution and delivery of this Agreement together with the receipt by Bank of the Waiver Fee (as defined herein). AGREEMENT NOW, THEREFORE, in consideration of Bank's continued extension of credit, the payment of the Waiver Fee and the agreements contained herein, the parties agree as follows: 1. Incorporation of Background. The background provisions set forth ---------------------------- above (including, without limitation, any defined terms set forth therein) are hereby incorporated by reference into this First Amendment and made a part hereof as though set forth in their entirety herein. 2. Funds Flow Coverage Ratio. The Funds Flow Coverage Ratio of ------------------------- the Loan Agreement is hereby amended from and after the date hereof and shall read in its entirety as follows: Funds Flow Coverage Ratio. Borrower shall maintain a Funds -------------------------- Flow Coverage Ratio of not less than 1.25 to 1.00, to be measured quarterly on a rolling four quarters basis at each quarter's end. "Funds Flow Coverage Ratio" shall mean the sum of earnings (excluding SI Baker and Egemin) before interest, taxes, depreciation and amortization, divided by the sum of all current maturities of long term debt and capital lease obligations plus interest expense. For purposes of calculating the Funds Flow Coverage Ratio, the amounts indicated below will be added on a non-cumulative basis to the earnings for the periods indicated: Period Ending Add Back Amount ------------- --------------- March 31, 2000 $1,800,000.00 June 30, 2000 $2,400,000.00 September 30, 2000 $1,900,000.00 3. Total Liabilities to Net Worth Ratio. The Total Liabilities ------------------------------------ to Net Worth Ratio of the Loan Agreement is hereby amended from and after the date hereof and shall read in its entirety as follows: Total Liabilities to Net Worth Ratio. Borrower shall, from ------------------------------------- closing until fiscal year-end December 31, 2000, maintain a ratio of Total Liabilities to Net Worth of not more than 1.80 to 1.00, and thereafter, Borrower shall maintain a ratio of Total Liabilities to Net Worth of not more than 1.75 to 1.00, to be measured quarterly at each quarter's end. "Net Worth" shall mean total assets (including the investment in SI Baker and Egemin) minus Total Liabilities. "Total Liabilities" shall mean all liabilities of Borrower, excluding debt fully subordinated to Bank on terms and conditions acceptable to Bank, and including capitalized leases and all reserves for deferred taxes and other deferred sums appearing on the liabilities side of a balance sheet, in accordance with generally accepted accounting principles applied on a consistent basis. 4. Current Ratio. The Current Ratio of the Loan Agreement is ------------- hereby modified and amended from and after the date hereof and shall read in its entirety as follows: Current Ratio. Borrower shall maintain a Current Ratio of not ------------- less than 1.20 to 1.00, measured quarterly at each quarter's end. "Current Ratio" shall mean the ratio of Current Assets to Current Liabilities. "Current Assets" shall mean all assets which are so classified in accordance with generally accepted accounting principles. "Current Liabilities" shall mean all liabilities which are so classified in accordance with generally accepted accounting principles. 5. Interest Rate. The Note is hereby modified and amended from ------------- and after the date hereof to provide that commencing on March 30, 2000, the unpaid principal balance shall bear interest at a rate equal to 3-months LIBOR plus 3.00%. 6. Subordinated Debt. Commencing on April 1, 2000, Borrower ----------------- shall not make any payments of Subordinated Debt until Borrower is in full compliance with all Financial Covenants as originally set forth in the Loan Agreement prior to the addition of the amounts to be added to the calculation of the Funds Flow Coverage Ratio as set forth in this First Amendment. Simultaneously with the execution of this First Amendment or immediately thereafter, Borrower and Bank shall execute and deliver to the Creditors a letter notifying the Creditors that no further payments will be made on the Subordinated Debt except as provided herein. 7. Waiver Fee. Simultaneously with the execution of this First ---------- Amendment by Borrower, Borrower shall deliver to Bank a modification/waiver fee (the "Waiver Fee") in the amount of $5,000.00. 8. Waiver of Existing Defaults. Bank hereby waives the Existing ----------------------------- Defaults. This waiver is limited to the Existing Defaults and shall not be construed as a waiver of any subsequent Default under the referenced Financial Covenants or Subordination Agreement, or of any existing or future Defaults under any other provisions of any Loan Documents. 9. Acknowledgment of Balance. Borrower acknowledges that the ------------------------- most recent Commercial Loan Invoice sent to Borrower with respect to the Obligations under the Note is correct. 10. Acknowledgments and Representations. Borrower acknowledges ----------------------------------- and represents that the Note, Loan Agreement and other Loan Documents, as amended hereby, are in full force and effect without any defense, counterclaim, right or claim of set-off; that, after giving effect to this First Amendment, no Default or event that with the passage of time or giving of notice would constitute a Default under the Loan Documents has occurred, all representations and warranties contained in the Loan Documents are true and correct as of this date, all necessary action to authorize the execution and delivery of this Agreement has been taken; and this First Amendment is a modification of an existing obligation and is not a novation. Effective the date hereof, all references in the Loan Documents to the Note or the Loan Agreement shall mean the Note and the Loan Agreement as amended by this First Amendment. 11. Collateral. Borrower acknowledges and confirms that there have ---------- been no changes in the ownership of any collateral pledged to secure the Obligations (the "Collateral") since the Collateral was originally pledged; Borrower acknowledges and confirms that the Bank has existing, valid first priority security interests and liens in the Collateral; and that such security interests and liens shall secure Borrower's Obligations to Bank, including any modification of the Note or Loan Agreement, if any, and all future modifications, extensions, renewals and/or replacements of the Loan Documents. 12. Miscellaneous. This First Amendment shall be construed in ------------- accordance with and governed by the laws of the applicable state as originally provided in the Loan Documents, without reference to that state's conflicts of law principles. This First Amendment and the other Loan Documents constitute the sole agreement of the parties with respect to the subject matter thereof and supersede all oral negotiations and prior writings with respect to the subject matter thereof. No amendment of this First Amendment, and no waiver of any one or more of the provisions hereof shall be effective unless set forth in writing and signed by the parties hereto. The illegality, unenforceability or inconsistency of any provision of this First Amendment shall not in any way affect or impair the legality, enforceability or consistency of the remaining provisions of this First Amendment or the other Loan Documents. This First Amendment and the other Loan Documents are intended to be consistent. However, in the event of any inconsistencies among this First Amendment and any of the Loan Documents, the terms of this First Amendment, and then the Note, shall control. This First Amendment may be executed in any number of counterparts and by the different parties on separate counterparts. Each such counterpart shall be deemed an original, but all such counterparts shall together constitute one and the same agreement. IN WITNESS WHEREOF, the undersigned have signed and sealed this First Amendment the day and year first above written. PLACE OF EXECUTION AND DELIVERY. Borrower hereby certifies that this First Amendment and the Loan Documents were executed in the Commonwealth of Pennsylvania and delivered to Bank in the Commonwealth of Pennsylvania. Paragon Technologies, Inc. (formerly, "SI Handling Systems, Inc.") Taxpayer Identification Number: 22-1643428 CORPORATE By: /s/ William R. Johnson, President & CEO ------------------------------------------------ SEAL William R. Johnson, President & CEO By: /s/ William F. Moffitt, Vice President - Finance ------------------------------------------------ William F. Moffitt, Vice President - Finance First Union National Bank By: /s/ William M. Hogan, Vice President ------------------------------------------ William M. Hogan, Vice President EX-10.18 3 EXHIBIT 10.18 Exhibit 10.18 ------------- MODIFICATION NUMBER ONE TO LOAN AGREEMENT Paragon Technologies, Inc. (formerly, "SI Handling Systems, Inc.") 600 Kuebler Road Easton, Pennsylvania 18040 Ermanco Incorporated 6870 Grand Haven Road Spring Lake, Michigan 49456 (Individually and collectively, "Borrower") First Union National Bank 702 Hamilton Mall Allentown, Pennsylvania 18101 (Hereinafter referred to as "Bank") THIS AGREEMENT is entered into as of January 31, 2000 by and between Bank and Borrower . RECITALS Bank is the holder of a Promissory Note executed and delivered by Borrower, dated September 30, 1999, in the original principal amount of $6,000,000.00 (the "Note"); and certain other loan documents, including without limitation, a Loan Agreement, dated September 30, 1999 (the "Loan Agreement"); Borrower and Bank have agreed to modify the terms of the Loan Agreement. In consideration of Bank's continued extension of credit and the agreements contained herein, the parties agree as follows: AGREEMENT ACKNOWLEDGMENT OF BALANCE. Borrower acknowledges that the most recent Commercial Loan Invoice sent to Borrower with respect to the Obligations under the Note is correct. MODIFICATIONS. The Loan Agreement is hereby modified by adding the following provisions: LETTERS OF CREDIT. Bank will issue standby letters of credit, (each, a "Letter of Credit" and collectively, the "Letters of Credit") provided, the aggregate amount available to be drawn under all standby Letters of Credit plus the aggregate amount of unreimbursed drawings under all standby Letters of Credit and the outstanding unpaid principal balance of the Note at any one time does not exceed $6,000,000, and further provided, no standby Letter of Credit shall expire more than 365 days after the date it is issued. Notwithstanding anything to the contrary contained herein, the aggregate outstanding principal balance of Advances (as defined in the Note) plus the aggregate amount available to be drawn under all Letters of Credit plus the aggregate amount of unreimbursed drawings under all Letters of Credit at any one time shall not exceed $6,000,000.00. The Letters of Credit are to be used by Borrower solely for the purpose of expediting the purchase of inventory. Bank's obligation to issue Letters of Credit shall terminate if Borrower is in default (however denominated) under the Note or the other Loan Documents, or in any case, if not sooner terminated, on September 30, 2002. LETTER OF CREDIT FEES. Borrower shall pay to Bank, at such times as Bank shall require, Bank's standard fees in connection with Letters of Credit, as in effect from time to time, and with respect to standby Letters of Credit, at the time of issuance of each standby Letter of Credit, a fee equal to 1.00% per annum on the face amount of the standby Letter of Credit for the period of time the standby Letter of Credit will be outstanding. ACKNOWLEDGMENTS AND REPRESENTATIONS. Borrower acknowledges and represents that the Loan Agreement and other Loan Documents, as amended hereby, are in full force and effect without any defense, counterclaim, right or claim of set-off; that, after giving effect to this Agreement, no default or event that with the passage of time or giving of notice would constitute a default under the Loan Documents has occurred, all representations and warranties contained in the Loan Documents are true and correct as of this date, all necessary action to authorize the execution and delivery of this Agreement has been taken; and this Agreement is a modification of an existing obligation and is not a novation. COLLATERAL. Borrower acknowledges and confirms that there have been no changes in the ownership of any collateral pledged to secure the Obligations (the "Collateral") since the Collateral was originally pledged; Borrower acknowledges and confirms that the Bank has existing, valid first priority security interests and liens in the Collateral; and that such security interests and liens shall secure Borrower's Obligations to Bank, including any modification of the Note or Loan Agreement, if any, and all future modifications, extensions, renewals and/or replacements of the Loan Documents . MISCELLANEOUS. This Agreement shall be construed in accordance with and governed by the laws of the applicable state as originally provided in the Loan Documents, without reference to that state's conflicts of law principles. This Agreement and the other Loan Documents constitute the sole agreement of the parties with respect to the subject matter thereof and supersede all oral negotiations and prior writings with respect to the subject matter thereof. No amendment of this Agreement, and no waiver of any one or more of the provisions hereof shall be effective unless set forth in writing and signed by the parties hereto. The illegality, unenforceability or inconsistency of any provision of this Agreement shall not in any way affect or impair the legality, enforceability or consistency of the remaining provisions of this Agreement or the other Loan Documents. This Agreement and the other Loan Documents are intended to be consistent. However, in the event of any inconsistencies among this Agreement and any of the Loan Documents, the terms of this Agreement, and then the Note, shall control. This Agreement may be executed in any number of counterparts and by the different parties on separate counterparts. Each such counterpart shall be deemed an original, but all such counterparts shall together constitute one and the same agreement. Terms used in this Agreement which are capitalized and not otherwise defined herein shall have the meanings ascribed to such terms in the Loan Agreement. ARBITRATION. Upon demand of any party hereto, whether made before or after institution of any judicial proceeding, any claim or controversy arising out of or relating to the Loan Documents between parties hereto (a "Dispute") shall be resolved by binding arbitration conducted under and governed by the Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association (the "AAA") and the Federal Arbitration Act. Disputes may include, without limitation, tort claims, counterclaims, a dispute as to whether a matter is subject to arbitration, claims brought as class actions, or claims arising from documents executed in the future. A judgment upon the award may be entered in any court having jurisdiction. Notwithstanding the foregoing, this arbitration provision does not apply to disputes under or related to swap agreements. Special Rules. All arbitration hearings shall be conducted in the city named in the address of Bank first stated above. A hearing shall begin within 90 days of demand for arbitration and all hearings shall conclude within 120 days of demand for arbitration. These time limitations may not be extended unless a party shows cause for extension and then for no more than a total of 60 days. The expedited procedures set forth in Rule 51 et seq. of the Arbitration Rules shall be applicable to claims of less than $1,000,000.00. Arbitrators shall be licensed attorneys selected from the Commercial Financial Dispute Arbitration Panel of the AAA. The parties do not waive applicable Federal or state substantive law except as provided herein. Preservation and Limitation of Remedies. Notwithstanding the preceding binding arbitration provisions, the parties agree to preserve, without diminution, certain remedies that any party may exercise before or after an arbitration proceeding is brought. The parties shall have the right to proceed in any court of proper jurisdiction or by self-help to exercise or prosecute the following remedies, as applicable: (i) all rights to foreclose against any real or personal property or other security by exercising a power of sale or under applicable law by judicial foreclosure including a proceeding to confirm the sale; (ii) all rights of self-help including peaceful occupation of real property and collection of rents, set-off, and peaceful possession of personal property; (iii) obtaining provisional or ancillary remedies including injunctive relief, sequestration, garnishment, attachment, appointment of receiver and filing an involuntary bankruptcy proceeding; and (iv) when applicable, a judgment by confession of judgment. Any claim or controversy with regard to any party's entitlement to such remedies is a Dispute. Waiver of Exemplary Damages. The parties agree that they shall not have a remedy of punitive or exemplary damages against other parties in any Dispute and hereby waive any right or claim to punitive or exemplary damages they have now or which may arise in the future in connection with any Dispute whether the Dispute is resolved by arbitration or judicially. Waiver of Jury Trial. THE PARTIES ACKNOWLEDGE THAT BY AGREEING TO BINDING ARBITRATION THEY HAVE IRREVOCABLY WAIVED ANY RIGHT THEY MAY HAVE TO JURY TRIAL WITH REGARD TO A DISPUTE. IN WITNESS WHEREOF, the undersigned have signed and sealed this Agreement the day and year first above written. PLACE OF EXECUTION AND DELIVERY. Borrower hereby certifies that this Agreement and the Loan Documents were executed in the Commonwealth of Pennsylvania and delivered to Bank in the Commonwealth of Pennsylvania. Paragon Technologies, Inc. (formerly, "SI Handling Systems, Inc.") Taxpayer Identification Number: 22-1643428 CORPORATE By: /s/ William R. Johnson ----------------------------------------------------------- SEAL William R. Johnson, President & CEO By: /s/ William F. Moffitt ----------------------------------------------------------- William F. Moffitt, Vice President - Finance First Union National Bank By: /s/ Peter A. Gray ----------------------------------------------------------- Peter A. Gray, Vice President EX-10.19 4 EXHIBIT 10.19 Exhibit 10.19 ------------- SECOND AMENDMENT TO LINE OF CREDIT NOTE AND LOAN AGREEMENT ----------------------- (LINE OF CREDIT) Paragon Technologies, Inc. (formerly, "SI Handling Systems, Inc.") 600 Kuebler Road Easton, Pennsylvania 18040 Ermanco Incorporated 6870 Grand Haven Road Spring Lake, Michigan 49456 (Individually and collectively, "Borrower") First Union National Bank 702 Hamilton Street Allentown, Pennsylvania 18101 (Hereinafter referred to as "Bank") THIS SECOND AMENDMENT TO LINE OF CREDIT NOTE AND LOAN AGREEMENT ("Second Amendment") is entered into as of March 30, 2000, by and between the Bank and Borrower. BACKGROUND A. Bank is the holder of a Promissory Note executed and delivered by Borrower, dated September 30, 1999, in the original principal amount of $6,000,000.00 (the "Note"); and certain other loan documents, including, without limitation, a Loan Agreement dated September 30, 1999 as amended by that certain Modification Number One to Loan Agreement dated January 31, 2000 (collectively, the "Loan Agreement"). B. The term "Loan Documents", as used in this Agreement, is defined in the Note. All capitalized terms used but not defined herein shall have the meanings assigned in the Loan Documents. C. Borrower has requested Bank to waive the following Defaults (collectively, the "Existing Defaults") under the Loan Documents: (i) Borrower failed to maintain the requisite Funds Flow Coverage Ratio for the period ending December 31, 1999; (ii) Borrower's aggregate outstanding Obligations exceeded the amount permitted under the Borrowing Base determined pursuant to the terms of the Loan Agreement for the period ending December 31, 1999; and (iii) Borrower defaulted under the terms of that certain Subordination Agreement dated September 30, 1999 (the "Subordination Agreement"), executed by Borrower, Bank and the Creditors identified therein, in that Borrower made payments of interest on the Subordinated Debt for the quarterly periods ending December 31, 1999 and March 31, 2000, at a time when Borrower was in default under the Loan Documents. D. Bank is willing to waive the Existing Defaults in consideration of Borrower's execution and delivery of this Agreement together with the receipt by Bank of the Waiver Fee (as defined herein). AGREEMENT NOW, THEREFORE, in consideration of Bank's continued extension of credit, the payment of the Waiver Fee and the agreements contained herein, the parties agree as follows: 1. Incorporation of Background. The background provisions set forth --------------------------- above (including, without limitation, any defined terms set forth therein) are hereby incorporated by reference into this Second Amendment and made a part hereof as though set forth in their entirety herein. 2. Funds Flow Coverage Ratio. The Funds Flow Coverage Ratio of the ------------------------- Loan Agreement is hereby amended from and after the date hereof and shall read in its entirety as follows: Funds Flow Coverage Ratio. Borrower shall maintain a Funds -------------------------- Flow Coverage Ratio of not less than 1.25 to 1.00, to be measured quarterly on a rolling four quarters basis at each quarter's end. "Funds Flow Coverage Ratio" shall mean the sum of earnings (excluding SI Baker and Egemen) before interest, taxes, depreciation and amortization (including the historical operations of Ermanco Incorporated prior to the September 30, 1999 acquisition of said entity by Paragon Technologies, Inc., (formerly, "SI Handling Systems, Inc." ), divided by the sum of all current maturities of long term debt and capital lease obligations plus interest expense. For purposes of calculating the Funds Flow Coverage Ratio, the amounts indicated below will be added on a non-cumulative basis to the earnings for the periods indicated: Period Ending Ad Back Amount ------------- -------------- March 31, 2000 $1,800,000.00 June 30, 2000 $2,400,000.00 September 30, 2000 $1,900,000.00 3. Total Liabilities to Net Worth Ratio. The Total Liabilities to ------------------------------------ Net Worth Ratio of the Loan Agreement is hereby amended from and after the date hereof and shall read in its entirety as follows: Total Liabilities to Net Worth Ratio. Borrower shall, from ------------------------------------- closing until fiscal year-end December 31, 2000, maintain a ratio of Total Liabilities to Net Worth of not more than 1.80 to 1.00, and thereafter, Borrower shall maintain a ratio of Total Liabilities to Net Worth of not more than 1.75 to 1.00, to be measured quarterly at each quarter's end. "Net Worth" shall mean total assets (including the investment in SI Baker and Egemen) minus Total Liabilities. "Total Liabilities" shall mean all liabilities of Borrower, excluding debt fully subordinated to Bank on terms and conditions acceptable to Bank, and including capitalized leases and all reserves for deferred taxes and other deferred sums appearing on the liabilities side of a balance sheet, in accordance with generally accepted accounting principles applied on a consistent basis. 4. Current Ratio. The Current Ratio of the Loan Agreement is ------------- hereby modified and amended from and after the date hereof and shall read in its entirety as follows: Current Ratio. Borrower shall maintain a Current Ratio of not ------------- less than 1.20 to 1.00, measured quarterly at each quarter's end. "Current Ratio" shall mean the ratio of Current Assets to Current Liabilities. "Current Assets" shall mean all assets which are so classified in accordance with generally accepted accounting principles. "Current Liabilities" shall mean all liabilities which are so classified in accordance with generally accepted accounting principles. 5. Borrowing Base. The first paragraph of the Loan Agreement -------------- concerning the Borrowing Base is hereby amended from and after the date hereof and shall read in its entirety as follows: Borrowing Base. "Borrowing Base" means (a) 80% of the net --------------- amount of Eligible Accounts, plus (b) 40% of the value of Eligible Inventory, plus (c) 80% of the current fair market value of the Property (as hereinafter defined) as determined by appraisal satisfactory to Bank, plus (d) 100% of the Orderly Liquidation Value of Equipment, unencumbered by any liens other than in favor of Bank, plus (e) an amount equal to $2,500,000.00, which amount shall be reduced by $625,000.00 every 6 months during the first 2 years of this Loan, until such amount reaches zero (0) on the second anniversary of the date of this Agreement, minus (f) the unpaid principal balance of the Term Loan. If the foregoing calculation of the Borrowing Base results in a negative number, Bank shall notify Borrower in writing, and within five (5) days after receiving such written notice, Borrower shall either (i) make a principal payment under the Term Loan sufficient to eliminate such deficiency, or (ii) deposit with Bank cash in an amount sufficient to eliminate such deficiency, which cash amount shall be held in a separate escrow account by Bank until such time as the cash escrow account is no longer required in order to achieve compliance with the foregoing Borrowing Base calculation. 6. Subordinated Debt. Commencing on April 1, 2000, Borrower shall ----------------- not make any cash payments of Subordinated Debt until Borrower is in full compliance with all Financial Covenants as originally set forth in the Loan Agreement prior to the addition of the amounts to be added to the calculation of the Funds Flow Coverage Ratio as set forth in this Second Amendment. Simultaneously with the execution of this Second Amendment or immediately thereafter, Borrower and Bank shall execute and deliver to the Creditors a letter notifying the Creditors that no further payments will be made on the Subordinated Debt except as provided herein. 7. Waiver Fee. Simultaneously with the execution of this Second ---------- Amendment by Borrower, Borrower shall deliver to Bank a modification/waiver fee (the "Waiver Fee") in the amount of $5,000.00. 8. Waiver of Existing Defaults. Bank hereby waives the Existing --------------------------- Defaults. This waiver is limited to the Existing Defaults and shall not be construed as a waiver of any subsequent Default under the referenced Financial Covenants or Subordination Agreement, or of any existing or future Defaults under any other provisions of any Loan Documents. 9. Acknowledgment of Balance. Borrower acknowledges that the most ------------------------- recent Commercial Loan Invoice sent to Borrower with respect to the Obligations under the Note is correct. 10. Acknowledgments and Representations. Borrower acknowledges and ----------------------------------- represents that the Note, Loan Agreement and other Loan Documents, as amended hereby, are in full force and effect without any defense, counterclaim, right or claim of set-off; that, after giving effect to this Second Amendment, no Default or event that with the passage of time or giving of notice would constitute a Default under the Loan Documents has occurred, all representations and warranties contained in the Loan Documents are true and correct as of this date, all necessary action to authorize the execution and delivery of this Agreement has been taken; and this Second Amendment is a modification of an existing obligation and is not a novation. Effective the date hereof, all references in the Loan Documents to the Note or the Loan Agreement shall mean the Note and the Loan Agreement as amended by this Second Amendment. 11. Collateral. Borrower acknowledges and confirms that there have ---------- been no changes in the ownership of any collateral pledged to secure the Obligations (the "Collateral") since the Collateral was originally pledged; Borrower acknowledges and confirms that the Bank has existing, valid first priority security interests and liens in the Collateral; and that such security interests and liens shall secure Borrower's Obligations to Bank, including any modification of the Note or Loan Agreement, if any, and all future modifications, extensions, renewals and/or replacements of the Loan Documents. 12. Miscellaneous. This Second Amendment shall be construed in ------------- accordance with and governed by the laws of the applicable state as originally provided in the Loan Documents, without reference to that state's conflicts of law principles. This Second Amendment and the other Loan Documents constitute the sole agreement of the parties with respect to the subject matter thereof and supersede all oral negotiations and prior writings with respect to the subject matter thereof. No amendment of this Second Amendment, and no waiver of any one or more of the provisions hereof shall be effective unless set forth in writing and signed by the parties hereto. The illegality, unenforceability or inconsistency of any provision of this Second Amendment shall not in any way affect or impair the legality, enforceability or consistency of the remaining provisions of this Second Amendment or the other Loan Documents. This Second Amendment and the other Loan Documents are intended to be consistent. However, in the event of any inconsistencies among this Second Amendment and any of the Loan Documents, the terms of this Second Amendment, and then the Note, shall control. This Second Amendment may be executed in any number of counterparts and by the different parties on separate counterparts. Each such counterpart shall be deemed an original, but all such counterparts shall together constitute one and the same agreement. IN WITNESS WHEREOF, the undersigned have signed and sealed this Second Amendment the day and year first above written. PLACE OF EXECUTION AND DELIVERY. Borrower hereby certifies that this Second Amendment and the Loan Documents were executed in the Commonwealth of Pennsylvania and delivered to Bank in the Commonwealth of Pennsylvania. Paragon Technologies, Inc. (formerly, "SI Handling Systems, Inc.") Taxpayer Identification Number: 22-1643428 CORPORATE By: /s/ William R. Johnson, President & CEO ----------------------------------------------------------- SEAL William R. Johnson, President & CEO By: /s/ William F. Moffitt, Vice President - Finance and CFO ----------------------------------------------------------- William F. Moffitt, Vice President - Finance and CFO First Union National Bank By: /s/ William M. Hogan, Vice President ----------------------------------------------------------- William M. Hogan, Vice President EX-27 5 ART. 5 FDS FOR 1ST QUARTER 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000090045 1,000 PARAGON TECHNOLOGIES, INC. 3-MOS DEC-31-2000 MAR-31-2000 777 0 10,684 55 3,950 20,040 10,237 6,938 43,615 14,081 15,138 0 0 4,185 10,012 43,615 18,344 18,344 13,912 13,912 0 0 421 1,289 517 772 0 0 0 772 .18 .17
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